CRA finds that excess-value charges on UK-source pension payments imposed by HMRC did not qualify as foreign income tax, or reduce pension income

At the time of a “benefit crystallization event” (e.g., retiring or turning 75) for a pension plan member, the UK tax authority (HMRC) imposed a “lifetime allowance charge” on 25% of the amount by which the total value of the member’s pension entitlements exceeded a threshold amount (recently, £1,073,100). HMRC considered that the charge was not a tax on income, so that a Canadian-resident member would not benefit from the exemption under Art. 18 of the Canada-UK Treaty.

In finding that the charge, even though collected by way of deduction against pension payments made to the Canadian-resident pension plan member, did not qualify for a foreign tax credit, CRA stated:

While the Charge is a charge to tax, it is not computed on income or profits, nor is it similar to the tax imposed under Part XIII of the Act. Rather, the Charge is computed on the basis of the size of a taxpayer’s pension scheme … [net of] the “lifetime allowance” … .

CRA went on to find that such deduction did not have the effect of reducing the pension income of the member pursuant to s. 56(1)(a)(i).

Neal Armstrong. Summaries of 18 November [sic] 2024 External T.I. 2021-0917031E5 under s. 126(7) – non-business income tax and s. 56(1)(a)(i).